Integration Strategies in M&A Part 1

24:29I think that's right. I also think it is natural for to-be-acquired executive teams to know how things are going to be post-close. There's no one better positioned to answer those questions than the integration leader. Great points. I think that's a big case there. Encourage more companies to take that approach. Some people have asked me about that before. Oh, Chris, how did you take over due diligence? It wasn't from one day to the next. It was a process over several years where we would lean in more heavily. There was maybe a new deal lead that was coming in. It was like, hey, this is my first deal at Amazon.

25:01Can you guys lean in a little bit more on diligence? Yeah, absolutely. And then we did that very deliberately. And then we wrote down what we did. And so the other people on the team could learn from that. We just built a reputation within CorpDev, I think, of being good leaders of due diligence. And it took several years to do that. But it wasn't overnight. I think turning up and saying, hey, I want integration to run due diligence is not the best approach. It took years and it took a lot of very strong execution through those transactions to build us to that position. And then it just became, of course, integration is going to run this due diligence process.

25:37Who else is going to do it? Who else is going to take that role? And it just became the way it got done. Is there anything that you do differently than the deal team was doing prior in running diligence? I know we got a lot of good benefits, but in terms of how you actually did it. deal leads would typically use their own approach. And so there was more variability between the approaches. The deal leads were very experienced. They'd done deals at other companies. They had been private equity and venture capital, like very seasoned deal folks. But there wasn't a consistent approach to how to do deals within Amazon early on.

26:09And each one was fine on its own. But then you have this broad cross-functional team who's working on every transaction, who has to think, oh, okay, today I'm working with Bob on this transaction and tomorrow it's Kevin on this transaction and I have to think differently. And so the broader cross-functional team very much appreciated the increase in consistent approach over time. And it also enabled the people running the deal or the deal leads running the transaction to be more focused on some of the issues that cropped up in due diligence and addressing those in negotiating the share purchase agreements, in working through the valuations, like deeply understanding financial models, it gave them more time to do the work which they are truly expert at by us taking some of that due diligence burden as well.

26:55I completely agree. And I mentioned it earlier, but I would retouch on integration, almost by definition, is inherently cross-functional. And so is due diligence. I think it makes a ton more sense to take the integration person with a highly relevant skill set to managing that cross-functional team and running due diligence in a far more efficient, structured way, which only, as we talked about earlier, helps reinforce the relationships both on the target side, but also internally. I remember any time of day or night getting on the phone with my HR M &A integration partner through due diligence processes, talking through various issues that would crop up.

27:33And not so much because they were a risk to the deal per se, which is appropriately what a corp dev negotiation lead would use as their filter. But integration folks, both cross-functionally and central corp dev players, intuitively understand from experience what the consequences and dominoes are going to be throughout the life of an integration and really the life of owning that company based on decisions, commitments, and statements are made pre-acquisition sign. Integration leaders very much are promise keepers, not just promise makers. So having those promise keepers in the room early on, I view is entirely essential.

28:12Great points. Reality check here is most of the companies I encounter are much, much earlier. They're not operating an Amazon deal here. There may be occasional acquirers doing zero to one deals that are starting to become that frequent acquirer doing consistent two deals. And that's when they're starting to put together a dedicated M &A team. Given that scenario, how would you, given all this lessons learned from 100 plus deals, position your approach in terms of how you would start structuring that M &A function to be able to execute given some of the things that we just talked about? There's critical milestones in an M &A transaction.

28:50And thinking about how you want to approach a milestone, whether that's we had consistent documentation for the kickoff. Okay, we signed a term sheet. What do you do now? And so we had consistency around the kickoff. We had consistency on the approach to due diligence, a standard due diligence list. And there's many M &A lawyers that can provide incredibly strong M &A due diligence lists, which then you can layer on the business specific areas. And then what does diligence write-up mean? What does it mean to complete diligence? What do you want to share with senior management about that? And then how do you make the decision to actually acquire the company or not when you get to the point of signing the transaction and committing the company to the transaction.

29:33And I think building some consistency around those key milestones is essential. And then that gives the team those goalposts to meet and working with them closely to do that on a consistent basis, I think is a great place to start. I think it's important to acknowledge and be honest that integration work is a full-time role. One of the biggest cautionary tales that I've encountered in working with some smaller companies is trying to make integration a 10 % to 20 % tax across every functional team, across the business sponsor, as well as the newly acquired company that's very much still running their business day-to-day.

30:16Ensuring that those costs are incorporated into the deal model, are understood and weighed in that decision-making that Chris is discussing, I think is super important and really can't be understated. In terms of completely acknowledging that maturing companies that are going from zero to one, it just does not make sense to hire a tenured, multi-year experienced integration professional. It's such a niche role. I would say that having a dedicated project or program manager that not just has the, let's say, organizational backbone of a project manager, but also is respected within the organization and is a project leader as well as a project manager that other folks at the company will look to as a legitimate leader.

31:03Driving change is absolutely essential. And where I would start as I was looking to close an acquisition, stand up an integration leader, whether it be the first time or early dozen, half dozen acquisitions at a company, and trying to build experience within regular players across the cross-functional team would be where I would start. One thing that we did at Amazon that was very early days and that I've seen a number of other smaller companies do is start to bucket the M &A integration roles, whether they be functional or central, in say a strategic projects team that actually has some variability built into their model.

31:40A lot of times I think M &A teams can be grouped with global expansion. There's a lot of commonality between some of what you'd encounter in entering into a new region or a new country that can be a parallel, not a perfect parallel, but there's some similarities with the types of issues that you encounter. That's another good way to start to centralize and drive consistency of the integration experience while growing a company that can't justify fully dedicated corp dev headcount. Dedicated headcount evolves over time. When I took the role, initially, it was just me. Thankfully, there was also an HR M &A person who was dedicated to that job, who also managed some other projects, but there was somebody in HR, there was somebody in legal, there was somebody in tax, and somebody in accounting.

32:23I was very fortunate to have those four people in place that were working through as the kind of two deals a year we were working on. You had a consistent team even at that point. And then it's being deliberate about which other teams do you add on over time. And in the end, you know, you skip forward 15 years and you had 16 cross functional teams with dedicated people, you know, some of them were still one person, but most of them were larger teams over time, incrementally building out. And as integration leaders, as leaders of the integration, central integration team, I felt that we were deeply responsible for that cross functional team as well.

32:59I felt strongly that I was responsible for their success, or I wanted them to be successful and do things to set them up for that. When keeping an eye out for those folks, like understanding which teams were struggling, how I could help them make the case for incremental headcount with their senior leaders. I think CorpDev has a strong voice in a lot of companies and did within Amazon. And if CorpDev was going in with them to say, yes, I think this is time to add dedicated headcount or bring on some consulting resources or do something else. I really try to look out for those teams and work with them to build them out over time.

33:36And incrementally, you end up with 16, but it took a lot of patience and education of leaders within those teams. And being scrappy and thoughtful around what things or what areas would they work on if there wasn't deals to be around. Global expansion is a great example, but being thoughtful around that's incredibly helpful. And over time, you build an M &A community within the organization that just makes deals better. makes the chance of success of deals increase as you build that community up across the company? A few different themes here. We had developing consistency through the process around the key milestones, defining this program manager, the central change leader, making that clear who that is.

34:17Then also your roadmap around the headcount as your M &A function matures, strategy evolves, and so forth. And the process piece, we already talked about this a little bit, right? M &A is a pretty big variable deal by deal. How do you strike that balance between creating a process for consistency, but also enabling the agility that you need to drive the success on these deals? Over time, you put in these sort of bigger documents or milestones. People would talk about a playbook and like, we don't really have a playbook. We're not that team. And I don't want to be a team that has a playbook where somebody pulls it off the shelf and starts at the top and works their way through it.

34:54It was challenging to build a process that had consistency but flexibility was always the challenge. And adding additional milestones or steps in a process that actually help people rather than just become incremental burden for folks. And so I was very conscious that the team is very on a deal. There's a lot of things happening. Me adding incremental administrative function on the team, I need to do that in a way that helps people rather than just benefits me or just benefits other people around the company. It's that balance of adding incremental steps and consistency, but also ensuring that people are aware that it's very flexible.

35:31And I think there's good starting places to come from. There's many a very large consulting company who has playbooks. You can come across the basic playbooks, which I think enable people to... People don't know what they don't know going into an acquisition if you're going from that zero to one. And so having a playbook just gives you a little bit of that confidence that you're not missing anything big or crazy, that you can always be back of, oh, okay, let's have a little look on the list. Was it there? Did we cover this? Is that okay? It's a nice backstop and it's a nice risk mitigation function.

36:02But then building up something that's more flexible over time is actually more important. One thing that I've done in the past is, and this is true for both working with sponsors as well as newly acquired leaders. I think it's very important to be crystal clear on what you believe the integration end state will be, both from a business perspective as well as a cross-functional perspective. And then I think it's important to be very flexible in how you get there and very cognizant what's happening in the business, both on the target side, as well as on the sponsoring side. For instance, there's a lot of companies that over time will require all companies to get on their financial systems for a variety of reasons.

36:39That doesn't mean it needs to happen in the first six months. It's important to take stock of what's happening at the newly acquired company. If they have a very important launch that's all hands on deck, 90 days post-close, then that financial integration is not going to start in those first 90 days. I think it's very important to be receptive and to be open to adjusting your integration approach, both from a timeline as well as a process or who's even responsible for leading the project. I've had great success in tapping into, as a result of the acquisition, underutilized target employees that are eager to be involved, that are eager to learn more and are likely auditioning for future roles at Amazon in that case.

37:23And having them lead change efforts and integration efforts is a great way for them to both learn about Amazon and for there to be a very authentic, self-driven change at the newly acquired company. So I would absolutely say, be clear, be honest about what change needs to occur and then be incredibly flexible in how you get there. I think it's very fair. And as an example, the CFO at a company goes through the acquisition, probably is a very central figure in due diligence, has worked incredibly hard through the transaction, and then you get to close. And if you have just a bunch of individual playbooks, you'll have the treasury team saying, oh, we need to move all your bank accounts to our bank.

38:01You need to redo all of your insurance. And in accounting, it's like, we can need month close. We need a tax site. We need this, that, the other. And on an individual basis, they're all appropriate things to do, but they don't naturally talk to each other unless a central integration team is being thoughtful around what truly do we need to do when? Do we need to do the bank accounts now? Or what would be the risk if we push that off for three months? If we got visibility, let's get visibility into the accounts today, but let's do that in three months time. Being very thoughtful and staged about what to integrate and when to do it is an important function of the integration team.

38:37As somebody who looks across that broad cross-functional team and something that a CFO or someone in that role is incredibly appreciative of that somebody's coming in and telling Amazon no or any company no. Because an acquired company finds it hard to say no because they want to be good corporate citizens. Most people are oftentimes very happy to be acquired. They want to show well in front of their new peers and their new bosses. And so they struggle to say no. And that is a very strong role of the integration team to come in there and be like, actually, let me go and take care of that for you.

39:10Or let's have a thought about how we should balance this out. Sounds like it's part of the culture that you have to develop of how you execute M &A. Can we go back pre-LOI? Talk to the deal folks out here because a couple of things we touched on a little bit was the culture. And there's a sense of that pre-LOI, but also this end state that you referred to. I wanted to get a sense of pre-LOI. What are the things that we should be doing to really understand the culture of this organization, the considerations around it? Are we looking for big red flags to know that this is a deal we shouldn't do?

39:42And then I guess lending into the end state as well. Like how much of that should be really defined? This is where I get really confused on this stuff because there is a lot that goes into how you integrate, obviously depending on the strategy for buying some technical capability and we're planning to integrate into a platform. But then we get LOI happy and we just put offers out there to get the deal going. Where do you actually strike that balance? Like how much of that needs to be defined and really factored in to get to that signed LOI? This is where your business sponsor is probably the best judge of how well a newly acquired target is going to fit into their organization.

40:19I do think, and this goes back to Chris's point related to, there's an incredible amount of volume pre-LOI versus the number of transactions that get through an LOI. It absolutely has to be process light. I wouldn't necessarily recommend a ton of documentation because I think that's a pretty quick way for it to never get used. But I do think being highly intentional with your sponsor, can you see yourself managing this team? How do you think it'll be to manage that CEO in particular are super important questions for the sponsor to opine on and be very confident that there is a positive path forward with that organization in the acquiring organization.

41:02I guess we need to separate the culture piece and the considerations around the integration itself. Culture piece sounds like a big off-front is this leadership team, those interactions you're having. Are you going to get along with them? Are there other components that you'd want to dig into? Obviously, there's like data online with Glassdoor and things like that. But is that really material? Glassdoor is incredibly helpful. But in that early interaction, it is primarily with a very small number of that leadership team. And so you have to come to conclusions based on those interactions. And there's also how people talk about their culture.

41:37Lots of people will claim a certain culture or will write down a certain culture and then act in different ways. It's understanding what the company's take on their own culture is, ensuring that they're acting following those guidelines that they've set themselves. And then separately thinking, where does that align to the acquiring company? Where could there be clashes? And how might that play out? Because every company does run differently and there will be pros and cons as that works through. That's important in the pre-LOI, like having a true deal rationale. What is the true value? What are the high level goals of this transaction are important and having a strong opinion about why you're buying it and where the value is.

42:15And then also being upfront and being like, we don't know that much today. Here's a bunch of things we're going to dig into in diligence. Or you go to leadership and say, we're looking to sign this term sheet. Here's our opinions today. Here's our risk. This is what we don't know. This is where we're going to focus our due diligence efforts on. Or we're going to dive deeply into this and we'll come back to you on this. Being upfront and honest about that can be very helpful in getting buy-in and just building that momentum through the transaction. Outside of culture, one of the biggest things to be mindful of is expected changes to a target company's operating model.

42:47Thinking back on my time supporting AWS, obviously, one of the leading cloud providers in the world, we would at times acquire companies that had on-premises offerings, whether it be physical hardware, whether it be downloadable software completely and totally orthogonal to the AWS business model. Huge challenge from an integration perspective, challenge for the employee base, and really thinking through what the magnitude of changes to that operating model will be, I think are important to wrap your head around early on and to ensure that you could see that organization, that executive team making it through that kind of change.

43:27And that's the sort of thing that I would encourage both deal leaders and sponsors to really think hard about early on. Building on what Chris said, I think it's less of a what's the right thing to do and more what to steer clear of. And I think the most important thing to steer clear of is just making open-ended promises. I think this is where discussion of independence, which is by definition, very ill-defined and I think means whatever the listener wants to hear, can be very dangerous and can end up being a multi-year pain. And we're still a pre-LOI to start defining these expected changes to the operating model.

44:02To be clear, I don't think that there is no impetus to communicate those things early on. Rather, I think it's important for the sponsor to start thinking them through. Rather, it's the other side of the coin, which is don't make promises that you're not sure you can keep. Got it. Thinking about this pre-LOI, we look at the business unit leader and working with them. And there's a big variance of M &A experience coming from those leaders. How does that toggle things around when you're working on a deal? If you have an inexperienced view leader? I think it's typical that's the case. There was a handful of times where we had repeat business sponsors.

44:38That's obviously great to have repeat business sponsors. But the typical is that a person is going through that for the first time or going through it for the first time with Amazon. Every company approaches M &A slightly differently. It's educating that person on the way deals are done at that organization is super critical. And it's key just to lean in. As Scott mentioned earlier, the business sponsor is such a critical person in the lifespan of that transaction. That person is going to own and live with this deal for many years into the future. And so it was our role to set that person up to be successful.

45:10We would do anything we could to help that person through that. The first thing we would do is sit down with that person and be like, okay, great. You sign a term sheet. This is now what this looks like for the next six weeks or three months or six months. Here's what you need to expect. And it wasn't just here's the process, because that doesn't sound that much fun. But it was, here's the questions you should be able to answer at different stages of this process. At a certain point, what's your view of the management team as individuals? And a wide variety of questions we would have them be thoughtful of.

45:41And we would provide them with a document. And the appendix had a consolidation of all of these questions in one page. And sometimes we go and talk to the sponsor a few weeks later. And sometimes you saw that page ripped off the back and pinned up on the wall. That's when I knew we had success. That's when that person was taking this seriously and was very involved and was going to make the time and be a great person to work with and was thinking about this in the way that we were hoping they were going to think about that. I would completely agree. And I would even offer some of my most positive experiences with sponsors was actually first timers.

46:14It's more important to approach an M &A scenario with genuine curiosity and to intentionally make time for it rather than just trying to squeeze it in is so critical. On the other side of that coin, some of my more challenging experiences was working with sponsors who had done maybe one or two deals and had formed very rigid ideas about how it's going to unfold. Not really thinking through that those experiences were based on the nuances of those earlier transactions and not necessarily representative of how everything's going to go. Pre-LOI, what are the most important questions I should be asking, observations I should be looking for?

46:53So as a business sponsor? As an integration leader, teaching the deal guys how to do deals. Clarity of vision. Many businesses face challenges in growth, in getting resources, in many respects. People can go down the wrong road to make an acquisition. Buy a large company. If I buy this company, it's going to solve my problem here. And I'm going to have less headaches in that area of my business tomorrow. People think buying a company might, that will run itself for a while. I don't need to worry about that part of the business so much. versus the reality, which is you buy any company as a leader, you're going to spend 30 plus percent of your time on that with that company or with that part of your business for an extended period of time.

47:34It is why are people making the acquisition? And is that going to play out in reality in the positive way they think that is the case? That's step one to me, because as we work through many deals, we have many lessons learned. We have many scars. We've made many mistakes. helping others learn from our litany of mistakes and litany of lessons learned versus the, oh, I did one deal last year. On the last deal I did, I did this thing. We'll just do that again. So it's like the clarity of vision and then how practical and pragmatic that is. And will people get the value out of it with that vision in place post-close?

48:08What does that vision entail? Is it also including like this whole go-to-market chain? As you start to get more granular, one thing that worked really well when I took the role focused on AWS, And I think as Chris alluded to in having a relationship with the negotiating leads, it's really about being a resource to them, that they feel confident that they can call in integration support anytime. One area in particular where I have regularly found integration folks to be more deeply aware is the absolute must-haves cannot negotiate within the parent company. So I'll give you an example. Multiple times, negotiation leads from CorpDev focused on AWS acquisitions would come to me and ask, is this possible?

48:50Is this something that our sales team would be willing to support? Is this something we can get over from a security perspective? How do you think about entering this new country for this acquisition? And those sorts of highly bespoke questions are exactly where an integration leader can add real value pre-LOI and simply being able to share with the deal leads. Actually, at that revenue number, the AWS sales organization isn't going to support that or isn't going to go beyond what their normal playbook would imply. No, we probably can't get over that from a security perspective. These are the sorts of things that we've done in the past, and this is what it might mean for that business.

49:30Understanding those things early on is absolutely essential to understanding what the probability of success from that acquisition would be. it's less about having universal set of questions and more about being a resource to those corp dev professionals having that strong relationship and being able to on demand bring that integration experience to bear as new issues are encountered pre-LOI. It's more about the curiosity for you to understand clarity of the vision and the deal rationale. Yeah. I guess that goes the same with culture too. Just asking them how do they do things, make decisions.

50:03I think culture is tricky. You learn a lot about culture during due diligence. culture is pretty high level, pre-LOI. And again, just that the interactions with the folks and how they react in certain situations and how they make decisions. But as you engage with a much broader team in due diligence and actually go in and do cultural due diligence and have a change manager be in there and being thoughtful and deliberate about that. But I think pre-LOI, it's relatively high level. All right, that's the first part of a discussion with Chris and Scott. A lot around integration strategies and approaches.

50:36The second half, we talk a lot more around the change management specifically. But look for part two. Until next time, here's to the deal.

50:57Thank you for taking the time to explore the world of M &A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M &A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email, Kisan, K-I-S-O-N, at mascience.com. Or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter.

51:42Again, that's mascience.com. Here's to the deal.

51:55views and opinions expressed on M &A science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual this podcast is purely educational and is not